RETAIL LUXURY BRANDS IN CHINA CONSUMER MARKETS ppt

For example:• The majority of respondents regard owners of luxury brands as being successful and having good taste • Fewer than 2 percent of respondents regard owners of luxury brands as

C O N S U M E R M A R K E T S

Luxury brands and the retail sector in China 10

China has experienced a relentless surge in consumer buying power since the 1990s The Chinese consumer has become wealthier and more accepting of Western retail formats – with international supermarket chains, department stores and mass retailers paving the way for luxury retailers Luxury brand companies have been investing in the Chinese market, with Louis Vuitton, Bally, Gucci and Ferragamo among the first wave of retailers to open outlets in China more than 10 years ago.1 But now, with consumer spending power increasing and the loosening of government restrictions, foreign luxury brands face pressure

to strengthen their commitment to the mainland or risk losing ground to their rivals

Luxury is a constantly evolving and subjective concept, and not easy to define But more often than not, the word is used to define an inessential but desirable item or a state of extreme comfort or indulgence What sets luxury brands apart

is that they command a premium without clear functional advantages over their counterparts Yet consumers are willing to pay the significant price difference because they have a unique set of characteristics including premium quality, craftsmanship, recognisability, exclusivity and reputation.2

Luxury brands not only convey a standard of excellence, but act as social codes indicating access to the rare, exclusive and desirable.3 This makes the luxury market a particularly interesting one because it represents consumption at its most hedonistic and seemingly irrational – purchasing for the personal pleasure it provides despite the financial cost

1 “Luxe biz takes off in Chinese market”, Footwear News, Vol 61 (17), 2005

2 “The mass marketing of luxury”, Business Horizons, Vol 41 (6), 1998

3 Kapferer, J.N.: Reinventing the Brand, 2001

Nick Debnam

Head of Consumer Markets, Asia Pacific

KPMG in China and Hong Kong SAR

report we profile the patterns of luxury consumption in China and explore some

of the trends and challenges facing luxury brands, including the complexities

of valuation and classification, which can have important tax and regulatory

implications The report includes some excellent primary research from TNS, which highlights how attitudes towards luxury brands vary within this huge and diverse country

We would like to extend warm thanks to the Australian Centre for Retail Studies

at Monash University and TNS in China for their efforts in researching and

compiling this collaborative report

In October 2006 TNS surveyed more than 830 people across China on their attitudes and spending habits towards luxury brands The respondents were identified by age and place of abode All respondents were between 20 and 45 years of age and resided in first or second tier cities, earning a minimum of RMB 3,000 per month Almost two-thirds of the respondents were married and 77 percent were educated to college or university level.

Key findings from TNS

About TNS

TNS Shanghai28th Floor, Finance Square

333 Jiujiang RoadShanghai 200001China

Tel: +86 (21) 6360 0808

Contacts

Paul ZhouDirector Paul.zhou@tns-global.comSandy Chen

Associate Research DirectorSandy.zhan.chen@tns-global.com

TNS is one of the world’s leading market research companies, providing custom research and analysis, political and social polling, consumer panel, media intelligence and TV and radio audience measurement services TNS provides market measurement, analysis and insight through a global network of operating companies in 70 countries TNS’ strategic goal is to be recognised as the global leader in delivering value added information and insights that help their clients to make more effective decisions "TNS is the sixth sense of business"

The survey shows that attitudes to luxury brands among China’s aspiring middle class are overwhelmingly positive For example:

• The majority of respondents regard owners of luxury brands as being successful and having good taste

• Fewer than 2 percent of respondents regard owners of luxury brands as

n Strongly agree n Agree

Figure 2: Attitudes towards people who own luxury brands

Percent

Percent

Owning luxury goods demonstrates my success and social status

I appreciate the superior quality of luxurious brands, not

simply the pursuit of famous brand names

I long for luxury goods but I can’t afford them right now

I own luxury goods because of work necessities

I own luxury goods to reward myselfLuxury goods give me confidence

I own luxury goods because they are popular in my social circle

I don’t like to show off, so I would not buy any luxury goods

I am practical and not willing to pay the premium claimed by

Figure 3: I own luxury goods to reward myself (by income)

status

I own luxury goods because they are popular in my social

circle

n Shanghai n Beijing n Guangzhou n Tier II cities

Attitudes towards luxury goods are equally positive among different age and income segments However higher income consumers claim they are more likely

to buy luxury goods as a means of self-reward

Respondents in Shanghai were, in many respects, the most cynical in their attitudes to luxury and the least likely to own luxury brands as a status symbol

The outlook remains positive for luxury consumption in China Consumers show

a strong intention to purchase luxury products in the next 12 months, with the appetite for luxury goods relatively similar among the three largest cities and second tier cities

The research from TNS confirms that attitudes towards credit among Chinese consumers are still somewhat conservative The willingness to purchase luxury goods on credit is still low, the exception being for bigger-ticket items such as jewellery

Figure 5: Intention to purchase luxury products in the next 12 months

n Average n Shanghai n Beijing n Guangzhou n Tier II cities

Figure 6: Willingness to purchase luxury items on credit

n Average n Shanghai n Beijing n Guangzhou n Tier II cities

Clothes Bags and

footwear

Watches Pens Comestics and

perfume

Jewellery0

While most purchases were made domestically, in most product categories at least 30 percent of shoppers had made luxury purchases in Hong Kong, Macau or Taiwan Shoppers proved more inclined to buy clothes, watches and jewellery in a branded store, but to buy accessories and cosmetics in a department store

Figure 7: Location of luxury purchases in past year

20

6040

80100

Jewellery

n Chinese mainland n Hong Kong/Macau/Taiwan n Southeast Asia

n Japan/Korea n Europe n U.S./Canada

Figure 8: Choice of retail format for luxury purchases

10

Jewellery

n Shopping mall n Deparment store n Branded store

n Outlet store/discount store n Online purchase

Foreign companies share a growing interest in tapping into China’s luxury market Statistics show not only that the number of wealthy people is growing fast in China, but that their willingness to spend on big-ticket items is also on the rise, driven by an appetite for status as well as the comforts and trappings of luxury products

China’s economy grew 10.3 percent in the first quarter of 2006 from the year earlier, overtaking the United Kingdom to become the world’s fourth largest economy According to a preliminary estimation by the National Bureau of Statistics in China, the GDP of China in the first half of 2006 was RMB 9.144 trillion, a year-on-year increase of 10.9 percent Total retail sales of consumer goods for the first half of 2006 also experienced significant growth, reaching RMB 3.644 trillion, a year-on-year rise of 13.3 percent Overall, China’s retail sales have been rising at their fastest pace as increasing incomes spur spending on cars, furniture and electronics.4

Retail sales have been rising alongside disposable income According to the National Bureau of Statistics of China, per capita disposable income of urban households stood at RMB 5,997 in 2005, an increase of 11.6 percent over the previous year, and a real increase of 10.2 percent after deducting price factors The per capita consumption expenditure stood at RMB 4,228, a year-on-year increase of 9.4 percent, and a real growth of 8.0 percent Cities are home to

Luxury brands and the retail

sector in China

4 “What’s in store in the luxury department”, Women’s Wear Daily, 13 June 2006

some 40 percent of China’s population, and average incomes in urban areas are often more than three times those in the countryside.5 In June 2006 retail sales

of urban consumer goods was RMB 2.462 trillion, a year-on-year increase of 14.0 percent; that of rural areas was RMB 1.183 trillion, increasing 12.0 percent.6

China’s retail market, 1998-2005

Source: National Bureau of Statistics of China

Demand for luxury brands

Asia is the largest target market for luxury brands, accounting for more sales than any other region, including Europe and the United States For instance, half of Switzerland’s USD 8 billion annual watch exports go to Asia France’s LVMH, the world’s largest luxury goods company, claims that 40 percent of world sales are generated in Asia while for its rival, Gucci, the figure is 45 percent.7

According to one of the world’s leading financial groups, Goldman Sachs,

consumption of luxury goods in China, except private jets and luxury yachts, reached USD 6 billion in 2004, making up 12 percent of the global total

consumption on the goods — up from 1 percent just five years previously

According to their findings China has turned into the third largest consumer of luxury goods in the world.8 Its share of the luxury market is only superseded

by Japan with 41 percent and the U.S at 17 percent It is expected to grow 20

low purchasing rate because of its 1.3 billion population While luxury-buying wealth is still spread extremely thin, the number of rich Chinese is rising fast In

1999 you needed just USD 6 million to be among Forbes Magazine's 50 richest people in China, while last year you needed USD 140 million to rank in the richest

100.10 Accordingly in 2006 it was reported that were around 300,000 U.S dollar millionaires among China’s more than one billion inhabitants.11

Market performance

Sales of luxury goods are booming across the world as the strength of the global economy helps to forge a new class of wealthy consumers in Asia, the Middle East and Eastern Europe Whether it is yachts, premium car brands, haute couture fashion, high-priced liquor or designer perfumes and hand-crafted watches, reports from companies making high-end products have been pointing

to a robust 2006 for their industry after a solid start to the year

Demand for luxury and fashion products has traditionally been regarded as fickle and highly susceptible to swings in economic sentiment However luxury brands have now enjoyed many successive years of growth According to Bain

& Co., worldwide sales of luxury goods are expected to grow at an average of about 6 percent up to the end of the decade, with the sector growing by as much as 9 percent in Asia.12 According to the Economic Research Institute in China, earnings from stock and property speculation have also contributed to the booming sales of luxury goods.13

The above-average growth in Asia is attributable in large part to China Goldman Sachs has predicted that China will consume about 29 percent of the world’s total luxury goods in 2015, surpassing Japan as the world’s top luxury brands market Their studies predict that the demand for luxury goods in China will grow

by 25 percent annually between 2006 and 2010, exceeding Japan’s expected 28 percent share at that time.14 A similar prediction is made by Merrill Lynch, which expects that extravagant offshore spending will see Chinese consumers likely to account for almost a quarter of global luxury goods purchases by 2014.15

Luxury car brands also predict significant growth in the coming years For example, luxury German car group Audi said in May 2006 that sales in China had almost doubled in the space of five months Mercedes-Benz said sales rose more than 20 percent year on year, while BMW AG began the year by posting the best total quarterly sales in the auto group’s history.16

Sales of certain luxury goods have been given a further boost by the progressive reduction of tariffs on imported luxury goods since 2005 in accordance with China’s commitments to the World Trade Organization For example, the 28 percent to 40 percent tariff that was levied on imported watches until the end of the year 2004 was cut to 12.5 percent and will be further reduced to 11 percent

by the end of 2006

10 “ Retailers eye untapped market”, The Australian, 16 April 2005

11 “China’s increasing demand for high-end bling”, The Luxury Institute, 14 June 2006

12 “Conspicuous consumption makes a comeback as luxury goods boom”, China Daily, 10 June 2006

13 “High stakes for high-end goods”, China Daily (North American ed.), 27 January 2005

14 “Luxury brands seeking more chance in China”, Chinaview, 9 November 2004

15 ”China luxury goods expected to surge”, Women’s Wear Daily, 4 October 2005

16 “Conspicuous consumption makes a comeback as luxury goods boom”, China Daily, 10 June 2006

While the Chinese luxury goods market is growing rapidly, an equally fast-growing segment of local industry has been counterfeiting Just as China has become the world’s leading assembler and exporter of manufactured goods, it is likewise said

to be dominating the underground trade in luxury fakes The U.S and EU assert that the majority of fakes seized at their borders are made in China Mainland Chinese counterfeit exports to the U.S accounted for 69 percent of total seizures last year, or about USD 64 million worth, according to U.S customs.The problem

is perhaps most pervasive in China because counterfeit operations are secretive, resilient and geographically dispersed.17

While government authorities are concerned that a proportion of profits from counterfeit goods are going to organised crime, companies are busy assessing the extent to which counterfeiting is undermining their brand value Ultimately, despite the opportunities created by emerging markets like China, India and

Russia, luxury brands are fighting battles on multiple fronts – and some say

luxury brands are fighting to hold on to their identity For them, the name

denotes a guarantee of quality and with counterfeits the guarantee of quality offered by luxury brands is being undermined Others suggest that the situation

While hard work and plain living have been revered virtues of the Chinese people for generations, there has been a growth in demand for foreign-branded or imported goods.19 But running counter to the growing habit of consumption in China is the traditional propensity to save Though luxury consumption is growing, for most the dominant social idea is still prudent consumption and undertaking no more than you can perform.20

Research suggests that while the emerging middle class will continue to save heavily, they will also spend increasing amounts of money.21 This is consistent with trends that suggest that China’s younger generation of teenagers and twenty-somethings show less of the caution of their parents and grandparents, and far more inclination to spend than to save

The Chinese mainland luxury market is still in its formative stage As Chinese consumers turn toward luxury goods as a means of rewarding themselves for their success or as a token advertising their wealth, analysts believe growth

in the world’s most populous country could boost Asia’s share of world luxury sales to 60 percent.22 China may however prove to be quite unlike any other developing market Rapid change has become the norm, and as such, the past may be a poor predictor of future trends

Profiling the Chinese consumer

19 ”Controversial consumption of luxuries”, China Daily (North American ed.), 6 August 2005

20 ibid

21 “The Value of China’s Emerging Middle Class”, McKinsey Quarterly, 2006 Special Edition

22 “Luxury foreign products make inroads”, China Daily, 14 November 2004

China’s unique characteristics

• Perception of beauty

While beauty in the West is often transformational and edgy with consumers less afraid to stand out from the crowd, studies suggest that Chinese women seek a more accessible, inclusive form of beauty Features that stick out are not generally perceived as attainable or attractive As such, in advertising, Chinese prefer to see Chinese faces, although a truly iconic foreign celebrity will also work because Chinese admire expertise, power and status.23

• Counterfeit goods

Most newly wealthy Chinese still want authentic products, but as a rule the

Chinese are far more price-conscious for example than the Japanese and

younger consumers have shown a willingness to mix cheap fakes with genuine products.24 Studies suggest that people in Hong Kong are becoming more

discerning when it comes to buying genuine clothing brands, accessories and electrical goods, despite the ready availability of fake goods.25 Luxury brands will

be hoping that a similar change in attitudes occurs, over time, on the mainland

• Shopping for pleasure

“Mall culture” has arrived in China and shopping is increasingly being adopted as

a leisure activity Retail Asia magazine predicts that by 2020 China will be home

to the seven of the world’s ten largest malls.26 This growing popularity of malls should help to increase the market size for luxury products, by strengthening brand awareness and aspiration

• Travel

Chinese nationals have shown a strong preference for purchasing luxury products overseas for two reasons First, shopping at the designer boutiques in Europe guarantees that the goods they buy are not counterfeit, something they can

not be sure of when shopping in some malls in China.27 Second, higher taxes

that by 2008, the number of Chinese overseas tourists will rise to 49 million The World Trade Organization further forecasts that about 100 million Chinese people will tour abroad in 2020.29

• Motivations: Aspiration and self-reward

The reasons why Chinese consumers purchase luxury brands bear similarities

to those in other countries But the research of TNS found that status and reward are two particularly strong motivations in China Among those surveyed, attitudes towards brands were overwhelmingly positive For example:

self-• More than 70 percent saw luxury brands as a way to demonstrate their status and success

• Less than 30 percent objected to paying a premium for a luxury brand

• Just over 60 percent of respondents bought luxury goods as a way to reward themselves for their hard work and success

Therefore, in China the consumption of luxury goods is very much item-driven, meaning consumers search for the latest collection or products At present

in China consumption tends to concentrate on personal accessories such as cosmetics, perfume and watches – smaller items that can be justified as rewards This is different to more developed markets where consumers tend to seek experiences or products more catered to their personal tastes

The luxury consumer: Key segments

Urban migration, paired with a wealthier overall population, has led to the emergence of new luxury customers in China These comprise a diverse group from youth to the middle-aged, from business executives and white-collar employees to the lowly educated, and from actors and actresses to the nouveau riche

• The traditional business elite

The traditional luxury shopper is typically male and over 35 They most likely hold a senior position with a domestic company or a government agency and are typically well-connected These luxury shoppers can be more advanced then other luxury shoppers in China Because they have been consuming luxury products for a longer period then other segments of the market their tastes are,

in some respects, more sophisticated than those of other luxury shoppers.30

While other buyers are only beginning to buy luxury products, the traditional shopper has moved on to luxury experiences and more niche luxurious products which are not necessarily so conspicuous They are demanding more value for money and are choosing to not only indulge themselves but also their family.31

• The new luxury shopper

Modern luxury shoppers represent a range of different customers including entrepreneurs, business people and celebrities What sets them apart is the fact that they are newly rich – very often the first generation in their family who

29 “The Gucci killers", Fast Company, Vol 102 2006

30 “Luxury’s Chinese puzzle”, Women’s Wear Daily, Vol 189 (126) 2005

31 “Luxury foreign brands make inroads”, China Daily, 14 November 2004